Savers 'set to lose £34bn' in the next three years as inflation gnaws away at paltry savings rates

A perfect storm of low savings rates, inflation and new policies on interest rates mean savers are collectively set to lose nearly £34billion over the next three years, according to a report.

With inflation running at 2.8 per cent, the average savings rate sitting at a paltry 1.66 per cent and Bank of England Governor Mark Carney indicating that the base rate will remain glued at 0.5 per cent until 2016 – unless unemployment falls rapidly – savers are set for more misery.

Eroding away: Inflation combined with paltry savings rates will have a detrimental impact on savers over the next few years

Save Our Savers based this calculation on the worst case scenario, with £1.2trillion held in cash savings across Britain remaining at an average of 1.66 per cent.

The Bank of England traditionally used higher interest rates to keep inflation under control, and as near to the two per cent target set by the Government as possible – although in recent years the rate-setters have allowed inflation to run much higher.

In a recent policy shift, Mark Carney has tied the base rate (or ‘bank rate’) to the level of unemployment, although if inflation looks set to breach 2.5 per cent then the Bank can raise rates to bring it back down.

When inflation is higher than the return on savings, money held in accounts loses value – the cash grows more slowly than the cost of living.

At present, there is only one savings account available that beats the cost of inflation, but savers have to tie-up their cash for seven years to get it with Skipton Building Society paying 3.5 per cent.

Jason Riddle, of Save Our Savers, told the Telegraph: ‘It’s an extraordinary situation. The statutory remit for the Bank of England Monetary Policy Committee is to target two per cent.

‘This was restated by the Chancellor as recently as March. However, the Bank’s new Governor, Mark Carney, appears unilaterally to have decided to change this to 2.5 per cent. We seriously question the legitimacy of such a move.’

Savers will hope that the economy recovers quickly enough for base rate to rise earlier than 2016.

Savers have suffered since base rate hit its 0.5 per cent low four and half years ago. At the same time, the Funding for Lending scheme launched this time last year has chipped away at rates further as banks and building societies can tap into cheap money from the Government, rather than rely on savers.

In January 2010 for example, the average top five fixed-rate bond was 4.53 per cent according to Moneysupmarket - today that has fallen to just 2.44 per cent.